You are a financial analyst charged with evaluating the asset efficiency of companies in the airline industry. The financial statements for ACE Aviation Holdings Inc. include the following note:

Interest Capitalized Interest on funds used to finance the acquisition of new flight equipment and other property and equipment is capitalized for periods preceding the dates the assets are available for service.

Required:

1. Assume that ACE Aviation followed this policy for a major construction project this year. What is the direction of the effect of ACE Aviation's policy on the following? Use + for increase, - for decrease, and NE for no effect.

a. Cash flows

b. Fixed asset turnover ratio 2. Normally, how would your answer to \((1 b)\) affect your evaluation of \(A C E\) Aviation's effectiveness in utilizing property, plant, and equipment?

3. If the fixed asset turnover ratio changes because of interest capitalization, does this change indicate a real change in efficiency? Why or why not?